Two-sided markets consist of two or more exclusive groups, present simultaneously on a single platform. They both need each other. In order to succeed the platform provider must ensure active participation of both groups. In the beginning these bazaars face chicken-and-egg problem, which should be solved, sometimes even by providing free chicken. These markets include some of the most important industries in new economy such as mobile telephony companies, free TV services, OS suppliers, software providers, gaming companies, credit card companies, auction sites etc. Ebay and amazon are good examples of two-sided markets. In such two-sided markets buyers and sellers first trade with the intermediary/ies so as to gain access to the functionalities of a platform and then trade with each other under oligopolistic conditions. In chapter 1 of this paper an attempt has been made to describe finer nuances of two-sided markets. Thereafter I proceed to discuss the various dynamics of two-sided markets in chapter 2. Two-sided firms differ from traditional industries and they follow totally different business economics. Marginal cost does not help them in deciding optimal price. Pricing policies and other business strategies must be formulated in such a way that it should ensure active interaction of both groups. Pricing strategy should get both sides on board and should also solve chicken-and-egg problem. Chapter 3 describes the pricing policy adopted by two-sided markets. Chapter 4 deals with relevance of two-sided markets for competition policy. Competition Authorities do not need different set of rules to regulate these industries. However Competition Authorities must consider various economic principles that influence pricing and investment decisions in two-sided markets. Chapter 5 concludes with various observations and suggestions.
Table of Contents
Introduction
1 An attempt to define two-sided markets
1.1 Existence of two or more groups
1.2 Getting and keeping critical mass
2 Dynamics of two-sided markets
2.1 Network effects
2.2 The chicken-and-egg problem
2.3 Multihoming
3 Economic rationale behind two-sided markets
3.1 Deciding optimal pricing structure
3.2 MC irrelevant for profit maximization
4 Relevance of two-sided markets for competition policy
4.1 Market Definition – SSNIP test
4.2 Market Power
4.3 Barriers to Entry
4.4 The Efficiency Factor
4.5 Predation
4.6 Other Issues
5 Concluding Observations and Suggestions
Appendix I: Examples of two-sided markets
Appendix II: Illustration of Multihoming: Credit Cards
Objectives and Topics
The primary objective of this work is to explore the distinct economic dynamics of two-sided markets and examine their implications for competition policy, specifically questioning whether traditional regulatory frameworks are sufficient for these unique industry structures.
- Defining two-sided markets and their requirement for a facilitator (catalyst).
- Analyzing network effects and the challenges of the "chicken-and-egg" problem.
- Evaluating pricing strategies where marginal cost is often irrelevant for profit maximization.
- Assessing how competition authorities should apply antitrust rules, such as market definition and barrier-to-entry analysis, to two-sided platforms.
Excerpt from the Book
1.2 Getting and keeping critical mass
As we read earlier in two-sided market there exists dependency between at least two groups. And to realize their full potential there must be mutual interaction among these groups. Presence of both sides is very critical for a successful two-sided market. Getting both sides on board is prime aim of platform provider. Every new participant brings more benefits to other participants. Getting and keeping this critical mass require different business economics. Very often subsidies are given on either side of the market to attract customers.
Dating club can be seen as traditional example of two-sided market. There business can be successful only if they attract enough members of opposite sex to their club to make a match likely. They need to formulate an effective pricing policy, so as to attract enough number and mix of patrons from both sexes and simultaneously generate enough surpluses to survive. One club does this by charging men $100 for membership, plus $20 a visit, and letting women in for free. This is probably based on assumption that equal pricing policy may not help in getting critical mass.
Summary of Chapters
Introduction: Provides an overview of two-sided markets, their prevalence in the new economy, and the necessity of specialized economic analysis for their regulation.
1 An attempt to define two-sided markets: Establishes the fundamental criteria for a market to be considered two-sided, emphasizing the presence of multiple user groups and a coordinating third entity.
2 Dynamics of two-sided markets: Examines how network effects, the chicken-and-egg problem, and multihoming define the competitive landscape of these platforms.
3 Economic rationale behind two-sided markets: Discusses why traditional marginal cost pricing models fail and how platform providers optimize their pricing structure to ensure participation.
4 Relevance of two-sided markets for competition policy: Investigates the application of antitrust principles like market definition, barriers to entry, and predation in the context of two-sided business models.
5 Concluding Observations and Suggestions: Summarizes the findings, arguing that while these markets are unique, regulatory authorities should focus on interdependencies rather than creating entirely new rules.
Keywords
Two-sided markets, platform providers, network effects, chicken-and-egg problem, multihoming, pricing strategy, competition policy, antitrust, market definition, SSNIP test, barriers to entry, predatory pricing, economic welfare, marginal cost, new economy.
Frequently Asked Questions
What is the fundamental nature of the business models discussed in this paper?
The paper focuses on two-sided markets, which are platforms that bring together two or more interdependent groups of users who require each other's participation to realize the full value of the service.
What are the primary thematic fields covered?
The central themes include the unique definition of these markets, the dynamics of platform adoption, non-traditional pricing structures, and the challenges faced by competition authorities in regulating these firms.
What is the core research objective?
The objective is to determine how traditional competition policy and antitrust frameworks, originally designed for one-sided markets, should be adapted to effectively evaluate two-sided platforms.
Which scientific methods are primarily utilized?
The work employs an analytical economic literature review, examining theories from scholars like Rochet, Tirole, and Evans, and applying them to case studies such as credit cards, software platforms, and the magazine industry.
What is the focus of the main body of the text?
The main body details the economic mechanics of two-sided platforms, specifically why marginal cost is often irrelevant for pricing and how "critical mass" is maintained through strategic subsidies.
Which keywords best characterize this work?
Key terms include two-sided markets, network effects, critical mass, antitrust, platform pricing, and competition policy.
How does the "chicken-and-egg" problem specifically affect platform startup costs?
It necessitates the use of subsidies to attract one side of the market before the platform has gained enough scale to be profitable, as one group will only join if they expect the other group to be present.
Why does the author argue against using standard marginal cost pricing for these firms?
Because these platforms often incur large fixed costs and very low variable costs; therefore, profitability is driven by attracting both sides of the market rather than balancing marginal cost and revenue for each individual transaction.
- Citar trabajo
- Jitendra Jain (Autor), 2006, Two-sided markets and their relevance for competition policy, Múnich, GRIN Verlag, https://www.grin.com/document/126737
